The best short in the market is still the best short in the market

Readers of this blog have seen me call LPS “The best short in the market” back when it was in the $30s. And I’ve continued to highlight it as the most likely next scapegoat in the banking crisis that seems to never end. How can it until we really do clean house, no?

Anyway, on Monday when the market was still open, I got this email from one of the subscribers to my independent service, TradingWithCody.com:

I wanted to send Cody an email regarding LPS and heading into the earnings report tonight. What is he planning to do with his short?

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My answer to him and the other subscribers was that I was planning on holding my short in this name steady. My answer in its entirety was:

LPS was one of the five worst performing stocks on the NYSE last quarter — just when we’d shorted it. LPS is still down some 35% or so from where I started shorting and buying puts back just 100 days ago or so.

That means I’ve got huge gains in both the common short position and the puts. To review though — I believe this company will end up being a major scapegoat in the entire multi-trillion dollar mortgage-gate disaster that is still developing in front of our eyes. And that means I do expect this company heads even much lower than it is already in coming months, quarters and years.

How to play it into the earnings report tonight? It depends on whether you think management will be really forthcoming in just how much litigation and outright criminal fraud exposure this company has right now. The management has no choice but to at least acknowledge some of the reality of their predicament on these conference calls, but since all financial firms, including LPS, have ridiculous leeway in how they recognize and report their numbers/losses/earnings/revenues/etc, I wouldn’t be trying to game this report tonight.

If the stock pops tomorrow, I’d welcome the chance to build this short and put position in LPS up even more than it is already. And as you know it’s been my biggest short position since I started trading again this year after having taken a 2.5 year TV timeout.

Well, the report came out and it was a doozy. LPS is down another 4%, which is nice because it’s at yet new lows again and obviously that’s increasing our profitability in this short yet again. But it’s not going to get me to increase this position’s size right now. With the stock barely down on this big re-financing deal, we might see a bounce at some point and get a chance to build it up some more yet.

Recall that they’d preannounced that earnings would be horrible this quarter, and they were, coming in at 56 cents, down huge from last year’s 89 cents a share. But much more important than the so-called earnings this quarter are tidbits like this in the report:

The company noted that, in light of current market conditions, it continues to evaluate its cost structure as well as potentially underperforming assets. As a result, the company recognized a pre-tax restructuring charge of $7.9 million during the quarter primarily relating to continued personnel reductions. Also, the company recognized a $31.8 million pre-tax asset impairment charge ($26.6 million for certain services now classified as discontinued operations and $5.2 million in continuing operations) relating to the write-down of certain investments that the company is evaluating for potential sale or wind down.

Or how about the fact that they’re suddenly looking to raise a billion dollars…asap:

The proposed financing is expected to consist of a $400 millionrevolving credit facility, a $350 million 5-year Term Loan A and a$550 million 7-year Term Loan B. Proceeds will be used to refinance existing indebtedness, pay related fees and expenses and provide for other general corporate purposes. The new senior secured credit facilities are expected to enhance liquidity, extend maturities, and provide more flexibility under the covenants.

This is looking more and more like the vicious cycle we were looking for when we started this short. The company’s desperate for cash just as their stock is crashing and the terms of financing are looking increasingly onerous.

After seeing these results, my confidence in this short increases yet again and hopefully, the stock will pop some or even stay here early in the morning so we can short even more.

Cody Willard writes Revolution Investing for Marketwatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody had no positions in the stocks mentioned.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.